Sharing Risks With Your Customers
People often need to buy something but don’t because they perceive risk in doing so. Even if they eventually make a critical purchase they linger over the decision for far too long. They ask: “What if it doesn’t work? What if turns out not to do what I wanted? What happens if the desire results don’t emerge?” A lot of risk is mitigated by the actions of the seller through devices such as warranties. If you know that you can return something if it breaks you’re more likely to buy it right away.
Personal injury attorneys have been aware of this for ages. They know that lawsuits, even strong ones, may not go the way their client wants them too. If you had to pay a lawyer upfront for prosecuting your suit you would be less likely to file one in the first place given the costs of doing so. So, attorneys who practice this type of law share the risk by agreeing to contingency payments.
Contingency payments are the sharing of the profits from an activity. It’s a bit like a commission. If you prevail in your lawsuit, the lawyer gets a portion of it. If you don’t, they don’t get paid. The attorneys’ payment is based on the money they generate.
This is becoming a more common tool for many other types of business. For example, there is a booming business in challenging real estate assessments. Firms get a paid a portion of what the property owner saves. Companies that help other companies reduce costs often take a percentage of the savings over time. No savings, no payment.
Unfortunately, this is still an underused tool. Most companies want to be paid for delivering services or goods, not for the outcome they generate. This is a mistake. First off, the fees you can generate are higher with contingency payments. It’s easier to give up a portion of a success then pay for something with an uncertain outcome. Payment is for performance not implied performance. This also makes the buy decision easier. Since it’s a less risky decision it’s an easier decision.
And, since the customer doesn’t pay until there are results, contingencies payouts can keep down litigation. There’s less reason to sue when you haven’t paid anything.
Contingency pay structures are not everyone. They work best when there are measureable financial outcomes. Simply delaying payments until delivery is not a contingency structure. That’s C.O.D.
Most of all, contingency fee structures require trust in the customer. This requires more due diligence than normal. if you think the customer will try and cook the books to reduce the fees then this isn’t a good time for contingency fee arrangements.
Still, in a difficult economy full of all types of business risk, this is another tool to close a sale. And we can all use more tools for generating revenue right now. Share the risk and share the reward. It’s the ultimate win-win.